What is typically true of the price-to-earnings ratio (P/E) for value stocks?

Value stocks are generally characterized by their lower price-to-earnings (P/E) ratios compared to growth stocks. A low P/E ratio typically indicates that a stock is undervalued relative to its earnings potential, meaning investors are paying less for each unit of earnings generated by the company. This can occur for various reasons, such as poor performance, market perception, or potential risks associated with the company or industry. Value investors look for such discrepancies in the P/E ratio as signals to identify stocks that might appreciate in value when the market eventually recognizes their true worth.

In contrast, growth stocks often have high P/E ratios because investors expect significant future growth, leading to higher prices today based on potential rather than current earnings. Understanding this distinction helps clarify the investment strategies associated with value versus growth stocks.